Insurance Creates Policy During Escrow, Cancelled Immediately

Software Engineer from Oakland, California

I just bought a triplex in Oakland, built in 1917, my plan was to rent out the 2x 1br's downstairs, and owner occupy the 2br upstairs.

I got a quote for insurance through an large agency, and a policy—and we were able to close escrow.

My lender was trying to help me achieve a low downpayment using FHA loan so I could use my liquidity for renovations . So they even went as far as to call my insurance agent and negotiate a higher deductible with a lower premium so that my monthly payment would fit within the FHA requirements.

After closing I started renovations—a few weeks into my contractor redoing my kitchen, an inspector from the insurance agency called and scheduled a time to view the property. They come, and seem nonplussed at some things, taking pictures of the entire property, and even the unit being renovated. Capturing photos of plumbing, and exposed electrical the electrician was actively working on.

I received a notice about a week later saying my insurance was being cancelled effective 2/1/2018. The notice included no reasons for cancellation, simply saying "4 major systems must be renovated." So I call them up, my agent was out from December 1st to Jan 8th, so I spoke with someone else. They say they want all new electrical (ROMEX), new plumbing (copper or PEX), a new roof, and new heaters (the heaters are new).

Basically it feels like they decided they don't want to insure me and threw everything they could at me to make it insurmountable to maintain my insurance with them.

I'm currently looking for another company to insure my property before my insurance runs out. Ultimately, based on what I've read, it seems insurance providers can do this as they see fit, and it's unlikely I'm going to find someone to cover me with with the dated electrical in some units.

I am feeling very much between a rock and a hard place with the needed renovations; I'm working with an electrician to see how we can upgrade the electrical, and most roofers are completely slammed this time of year and none are available, and as far as the plumbing goes—redoing the galvanized steel with copper will require gutting huge portions of the house. Basically the time-scale this will play out in is much longer than 60 days, and the costs will be much much higher than I can feasibly bite off all at once.

I feel like this should have been caught in escrow. How can I possibly be lead to believe a house is insurable and then have the rug pulled out from under me the second I own it. Dying from anxiety over here, trying to manage all this and my day job.

Investor from Oakland, California

replied 11 months ago

@Dustin Hoffman Not sure if this advice is too late. But I got cancelled last year as well. Apparently insurers in general don't want to see a property under construction. It's nothing specific. I received a refund check in the mail after I was cancelled, but no one actually reached out to tell me that I was cancelled. By the time I figured out what happened, the construction was done and I had renters in the place. So I just called up my ins boker, and got another policy going with a different company. That guy I met when he came out. Super friendly. Passed with flying colors.

The lesson I learned is don't let them inspect a vacant property and don't let them inspect a property under construction.

I just closed on a new place and have all contractors on hold until I can get the ins inspector in and out.

My advice would be to finish up the work you've got ASAP. It will take some time before your mortgage company comes calling about lack of insurance. Don't delay as I've had a mortgage company try to force me to buy insurance for a 2 month period in the past. I had a hard time wrapping my head around that one -- insurance for a past period, where nothing happened. Luckily it was as a result of switching insurance companies and I only needed to show the proof of insurance. But you can see the crazy stuff they will try to pull on you.

Software Engineer from Oakland, California

I'm wrapping up renovations ASAP for sure, and if the new insurance company tries to schedule an inspection I'll delay until everything is buttoned up.

As it stands, my agent totally goofed the policy and made it for an "owner-occupied" residency but not acknowledging tenants at all. The broker I am speaking with informed me that this policy would not cover any claims stemming from the renters (of which I currently have 1). So I view my current policy as useless as it stands.

Software Engineer from Oakland, California

replied 11 months ago

Well, the policy that's being cancelled is $2,052/yr, with a 5k deductible. Total dwelling value of $566k (less than the mortgage), but loss of use at 226k. For an "owner occupied triplex", insinuating I had family members occupying all units in the triplex...but that seems like terrible due diligence on their part to not establish/confirm that I was renting two

The broker I reached out to shared a policy document from an insurer for $1,311/yr, covering dwelling value of $725,000. The document doesn't actually list a deductible, but it did list the structure as a Single Family Dwelling so I clarified—which is when the broker let me know I need two policies, one for myself as the owner occupier, and another that covers having tenants.

Involved In Real Estate from Upper Marlboro, Maryland

replied 11 months ago

Best to deal with experts when it comes to insurance. Most “homeowners” policies automatically cancel when the property is vacant, becomes a rental, or is under construction. Many landlord/rental policies also (automatically) cancel when the property is vacant or under construction. During construction you’ll want “Builder’s Risk” and you’ll want to stay in touch with the insurance broker to let them know when construction ceases and you’re in lease up. Again, the key is to get a knowledgable broker who can get you everything you need, or will refer you to someone who can.